At the open 8-30-11

Still in recovery mode post Irene so I’m piecing together the summary without all of my resources so please forgive the more Spartan commentary.

• Today we get S&P/Case-Shiller data on housing prices for June and the 2nd quarter…Q2 housing price index is expected to be down 8.3% year over year…August consumer confidence is expected to decline to 52.0 from 59.5
• This morning Italy issued €3.75 billion of 10 year bonds @ 5.22%, €3 billion of 3 years at 3.87% and €1 billion of 7 years at 4.52%...
• Economic confidence in Europe plunged in August by the most since December 2008 as the apparent inability to deal with the debt crisis continues to take its toll. The index of executive and consumer confidence had been forecast at 100.2 (following a lowered July revision to 103) but the actual reading came in at 98.3.
• Corporate bond sales have ground to a halt in Europe as the credit markets there continue to exhibit the stress of the EU sovereign debt crisis and has driven yields and credit spreads higher. The volatility in spreads has made it difficult to price new issues in order to attract the necessary interest to keep banks from getting hung with new issue debt that could further impair their balance sheets.
• The Swiss Re catastrophe bond index fell 1.9% in the wake of Hurricane Irene…this is the largest decline since Hurricanes Gustav and Ike struck the US and Lehman failed in ’08…the index is down 6.4% this year
• As the US real estate market languishes sellers are starting to use the auction process more frequently, this is especially true for high priced properties…
• ArcelorMittal and Peabody Energy have finally succeeded in their bid to acquire Macarthur Coal after increasing their bid to $5.2 billion (A$16 from A$15.5)…
• Chinese companies are facing higher labor costs as the “one child” policy comes home to roost in an ever shrinking labor pool…it is projected that the three decade old policy will continue to burden businesses used to cheap and plentiful labor and could accelerate a capital spending boom as companies add automation to offset the declining labor productivity.
• The US Treasury has been able to extend maturities in this era of lower interest rates…the average maturity has extended 13 months to 62 months vs. 49 months in March 2009…this is a good tactical move but it isn’t reflected in public opinion as the administrations marks continue to slip as regards the economy.
• Oil stockpiles climb 0.2% in the US as refineries shut in production in advance of Hurricane Irene…the stockpile currently stands at 352.6 million barrels or a roughly 20 day supply assuming 18 million barrels per day of consumption.

Credit Markets – illiquidity in credit remains the primary risk to any notion of economic recovery and/ or equity market stability. European corporate issuance is fading in the face of wider spreads and increasing volatility as a solution for the EU debt crisis remains elusive. Yields on US Treasury bonds remain below 1% from 5 years in as the yield on the S&P 500 ETF (SPY) of 2.07% is within 14 basis points of the 10 year bond yield…with average high grade corporate bond spreads at 140 basis points vs. the 10 year (from CDX.NA.IG.15 index) this narrowing of bond yields to dividend yields will continue to drive investors toward the equity markets if macro data shows any signs of stability in the global economy.

Equity Markets – domestic futures are indicating a lower opening this morning after yesterday’s rally…Asian stocks were higher in overnight trading and European stocks are mixed with the FTSE playing catch up after being closed for business yesterday.

Oil Markets – West Texas Intermediate is down around $0.45/barrel this morning on the NYMEX although still solidly above $85 at $86.82. The spread versus Brent remains over $25 / barrel as unrest in Syria and the Libyan civil war continue to roil the MENA.

Phillip Pennell, CFA
Turnberry Capital Management
ppennell@turnberrycapital.net
(203) 861-2700 (w1)
(203) 327-1217 (w2)
(203) 327-1201 (f)

The information included in the above discussion is not intended to be used as a basis for making investment decisions nor should it be construed as a recommendation by the author to buy or sell any specific security. Individuals should consult their investment advisor prior to making any investment decisions.